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Another rate cut as growth, inflation hit new lows

Updated: Aug 12, 2019

The Monetary Board has decided to reduce policy rates for the second time this year as the country’s economic growth and headline inflation rate reached new lows.

Gross domestic product (GDP) growth was only 5.5% in the second quarter of 2019, the slowest in over four years, while headline inflation was 2.4% in July 2019, the lowest in two years.

Monetary Board Chairman and Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno announced on August 8, 2019 that the BSP’s overnight reverse repurchase (RRP) facility was reduced by another 25 basis points (bps) to 4.25 percent.

Accordingly, the interest rates on the overnight deposit and lending facilities were reduced to 3.75 percent and 4.75 percent, respectively.

The rate cut was announced a few hours after the Philippine Statistics Authority (PSA) said the country’s GDP grew by only 5.5% in the second quarter of 2019.

Two days earlier, the PSA also announced that the headline inflation rate weakened further to 2.4% in July.

Socioeconomic Planning Secretary Ernesto M. Pernia, in a press conference on August 8, said the economy would have to grow by an average of at least 6.4% in the second half of 2019 to meet the low end of the government’s growth target band of 6% to 7% for 2019.

He described the GDP growth as “the country’s lowest growth outturn in 17 quarters.”

“Friends, this growth slowdown serves as a challenge to us all, all branches of government and the private sector,” he said.

As anticipated last year, he said three factors impacted the economy: the El Niño phenomenon which was seen as the cause of the contraction in rice and corn production; the increasing protectionism in advanced economies (trade war between US and China); and the election ban on construction activities.

Diokno, in a separate press conference after the Monetary Board meeting on August 8, said the decision to reduce policy rates was based on assessment that price pressures have continued to ease.

The first rate cut of 25 basis points took effect on May 10, 2019, a year after policymakers first raised rates. Key interest rates were raised five times, for a total of 175 basis points, in 2018 to stem inflation.

Related Story: Policy rates cut as economy slows, inflation weakens further

Diokno said the latest baseline forecasts of the BSP indicate that inflation remains likely to settle within the inflation target of 3% ± 1 percentage point for 2019 up to 2021.

“The risks to the inflation outlook continue to be seen as broadly balanced for 2019 and 2020, while they are seen to tilt to the downside for 2021. Weaker global economic prospects continue to temper the inflation outlook. The potential adverse effects of a prolonged El Niño episode to inflation have subsided,” he said.

Diokno said prospects for global economic activity are seen to remain weak amid trade tensions among major economies.

But domestically, he said the outlook for growth continues to be firm on the back of a projected recovery in household spending and the accelerated implementation of the government’s Build Build Build infrastructure spending program.

“On balance, therefore, the Monetary Board believes that the benign inflation outlook provides room for a further reduction in the policy rate as a pre-emptive move against the risks associated with weakening global growth,” he said. (Ventures Cebu)

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